August 11, 2008

More ways you can mess up your estate plan—continued

By Robert P. Bergman
Special to the Times

In earlier parts of this article I presented a couple of the ways you can mess up your estate plan, either through improper planning, inadequate planning, or no planning at all. Here are a few more.

#6. Loss of control by adding someone else's name to your account

Jane lost her checking account to her father's creditors. She had put her father on her checking account so he could pay her bills while she was traveling. He had several creditors, however, and one of them filed a lien on the account. The bank was forced to pay her father’s creditor $80,000 of Jane's money. When he was added as a signer, he legally became a coowner of the account. He had the legal right under Colorado law to withdraw the entire account, and the creditor "steps into the debtor's shoes."

In addition, Jane was deemed to have made a taxable gift to her father at such time as the creditors withdrew money from the account! Don't you just love our tax laws!

Interestingly, if Jane had had a living trust, she could have had her father as a co-trustee with herself. As such, he still could have paid her bills from the account, but his creditors could not have attached the account. He would have been only a trustee and not an actual owner of the account.

When you simply add someone's name to your account, you are subjecting that account to his or her creditors. You don't have to be a bad person to be sued these days or to be subject to a tax lien.
A living trust can protect your assets while still allowing another person to pay your bills.

#7. Avoid common problems with Uniform Transfer to Minors Act Accounts

You can gift securities, money, or other investments to minor children and grandchildren by gifting such assets to a custodian for the beneficiary under the Uniform Transfers To Minors Act (commonly called UTMA accounts). Each account can have only one beneficiary and only one custodian (although a successor custodian can and should be named.)

Such a transfer is eligible for the annual gift tax exclusion, currently $12,000 in 2007, as it is treated as a direct gift to the minor. The account is treated as the property of the minor for income tax purposes and can be used for the minor's benefit in the custodian's discretion.

If the minor dies, the account will pass pursuant to the minor's will (if over 18 years of age and has a will) and if no will, will pass pursuant to the laws of “intestate succession.” At 21 years of age (or, if set up ahead of time, up to 25 years of age), the minor is entitled to whatever remains in the account. Such accounts can be set up at most banks or brokerage firms.

These accounts may be appropriate if you plan to gift small amounts (a few thousand dollars a year for a few years) to the minor. Chances are, the account will all be used up during the first year or two of college. But if you plan to gift $12,000 per year for many years, there could be several hundred thousand dollars in the account by the time the minor reaches 21 years old. Would that provide a disincentive for going to college? Would you really want that 21 year old to have full, unrestricted access to that much money at that age? With larger gifts, a specially drafted trust can avoid this problem.

If your minor grandchild with an UTMA account dies, the account usually passes by the laws of intestate succession to the grandchild's parents. If they are divorced, 50 percent passes to your child's ex-spouse. Again, a specially drafted trust can protect against this contingency. If the custodian dies and you have not named a successor custodian, then typically the probate court (at considerable expense) will appoint a successor custodian, usually the closest adult blood relative of the beneficiary. The ex-son-in-law (your grandchild's father) may be appointed as custodian.

A common mistake is having the donor serve as custodian. If you make the gift and are serving as custodian on your date of death, the UTMA account will be includable in your taxable estate. Yet, the goal of many people is making these gifts to remove the gifted amount from their taxable estate. Naming a relative to serve as custodian or your grandchild’s parent can solve this problem.

Robert P. Bergman is a San Jose estate-planning attorney and counselor who devotes his law practice exclusively to assisting individuals and couples plan for incapacity and the eventual transfer of their property to their heirs. He specializes in working with parents who have minor children. Visit his Web site at www.lawbob.com where you can learn more, get on his mailing list, register for an upcoming seminar, schedule a consultation, and read other articles on estate planning topics that he has written. You can also reach him by e-mail at rpb@lawbob.com or telephone at (408) 247-0444. All inquiries are confidential. This column is intended to provide general information about estate-planning ideas, concepts, and laws, and is not to be relied upon as rendering legal advice about your particular situation. No attorney-client relationship is created by these articles. The laws concerning estate planning, wills, trusts, and estate taxes are very complex, often state-specific, and change on a regular basis. Consult with an experienced attorney before taking any action that would affect your personal or business matters.